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Greenback flat on trade war escalation concerns again.

Currency-Market-Update-Tuesday-1
Albert Edwards
by Albert Edwards on October 01, 2019

CURRENCY MARKET UPDATE

U.S. dollar highlights:

USD firm after the Treasury department said there were no plans to prevent Chinese companies from listing on domestic exchanges. President Trump’s administration was discussing ways to limit portfolio inflows into China, and this could escalate the trade war (again). Trade negotiations between the world’s two largest economies will start next week in Washington with Chinese Vice Premier Liu He. Any escalation of the trade war will strengthen USD; meanwhile, markets are hoping the recent truce will lead to a deal and keep USD neutral.  Political risks will be the focus for USD direction this week and the September unemployment rate (available Friday).  Meanwhile, stocks are firm and bonds weaker.

Canadian dollar highlights:

CAD weaker after Producer Prices for August increased only 0.2% (versus 0.5% expected) and the Raw Material Price index for August dropped 1.8% (versus -1.5% expected). Oil prices will continue to affect CAD direction in addition to central bank policy and global trade developments. All eyes on July GDP (available today), Trade Balance and the Purchase Manager’s Index report (available Friday).

Euro highlights:

EUR dropped the lowest since May 2017 after weak inflation from Germany increased the chances the European Central Bank will need more aggressive moves to boost the economy.  German inflation dropped to 1.2% annually in September (from 1.4% in August) and the European Union harmonized measure of inflation dropped to 0.9%. Slow growth and inflation continue to affect EUR lower (due to Brexit uncertainty). Meanwhile, Unemployment rate for August reached the lowest level in more than eleven years at 7.4% (from 7.5% previously in July) to give hope of avoiding a recession. Inflation Rate for September expecting 0.9% today (previously 1%) as the outgoing President Mario Draghi will speak later today. New central bank President Christine Lagarde will take over in November and the pressure is on to cut interest rates further.

British pound highlights:

GBP remains defensive and vulnerable due to no-deal Brexit risks. British Chancellor Sajid Javid reiterated that the U.K. will leave the European Union with or without a deal. Meanwhile, the European Union summit will be later this month and markets are pricing in a possible extension from the October 31 deadline. GDP growth for Q2 improved to 1.3% yearly (from 1.2% previously). GBP direction will remain focused on Brexit news and how Prime Minister Boris Johnson intends to overcome the law blocking a no-deal Brexit.